The Week That Wasn't - Weekly Blog # 902

Mike Lipper’s Monday Morning Musings

 

"The Week That Wasn't"

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

History or Not

TWTWTW (Was the abbreviation for "That Was The Week That Was". The British had a somewhat comical review of critical news, with jibes at our doings or non-doings. In a number of ways this past week was one of increased anticipation of the steps toward smoothing out some of our problems. The most critical was a cease fire in Ukraine, which would be a step toward ending the killing in that war torn country, and would also influence global economic trends. These results were expected to lead to more sales in the US and abroad, allowing the Fed to lower interest rates.

 

At the so-called summit in Alaska the two antagonists spent three hours restating existing positions but found only some unannounced agreement on how to reach a ceasefire.

 

At the same time a collection of US central bankers met to discuss economic policy, which to most of the public was encapsulated to mean changing the short-term Federal Funds rate. The official topics to be discussed were demographics, productivity, and immigration’s impact on changing the US job market.

 

Some available data points indicate that early in the next century the US population will peak. Long-term labor productivity is largely driven by education, beginning at the earliest school and home days through the graduate levels. Education is lacking appropriate leadership and funding. In the past, immigration brought us hard-working, intelligent people, a trend that could now be reversing.

 

What is the Data saying?

The following are some data points I am reading, in no particular order:

1. This being an investment blog it is important to note that the bottom of the US stock market occurred in 1929, before depression analysis officially began. This suggests the stock market may be an early warning signal.
2. The "Taylor Rule" predicts the Fed funds rate. It states the current Fed funds rate of 4.5% should be 5%.
3. Deere reduced its revenue estimate. Farm income was in a recession before the depression, and it was one reason for passage of the Smoot-Hawley Tariff. (I believe one reason the current Fed has been reluctant to lower interest rates are the many smaller midwestern and western bank loans and the feelings of their senators. Jamie Dimon is also concerned that it is difficult to quickly take over community banks under present rules.)
4. Jerome Powell is looking at the impact of tariffs on business services excluding shelter, which appears to be rising faster than other measures of inflation. In the month of July business services rose 1.4%.
5. Over the last 3 weeks the AAII sample survey’s bearish projections have risen to 46.2% from 33.0%.
6. Each Saturday The WSJ measures the prices of 72 items. In studying the data, I have noted that the single largest gainer or decliner often results from an unusual market factor. Consequently, I look at the second biggest gainer or loser and look at the spread between the two. In the latest week S&P 500 Health Care rose +4.62% while Comex Gold sank -3.00%, a spread of 7.62% which looks normal.
7. In the week ended Thursday, the best performing mutual fund peer groups were those unpopular for most of this year. (This suggests for the moment that there is safety in unpopularity. If you are looking for the best odds, bet on a material change. All three of the small company categories: growth, core, and value show promise.

 

Working Conclusion

Beneath the surface there is a lot happening, both in the long-term (the next century) and from a trading viewpoint. One should pay attention to quiet markets.

 

 

 

Did you miss my blog last week? Click here to read.

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A. Michael Lipper, CFA

 

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Four Lessons Discussed - Weekly Blog # 877

 

 

Mike Lipper’s Monday Morning Musings

 

Four Lessons Discussed

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 Farmers’ Experience Led to the Crash

Is 1930 a preview of 202x? To set the stage, the 1920s were a period of transition and economic expansion. America and most of the industrial world enjoyed meaningful economic progress spurred on by the encouragement of increased debt. Governments, companies, individuals, and farmers used the resources of others to leverage their assets with increasing debt, fulfilling their perceived needs at ever increasing rates. The lessons of the 50-years before WWI were distant memories.

 

Due to WWI mobilization, women entered the workforce in increased numbers. The returning military found farm work too hard and too poorly paid on the farms. Financial communities, which had extensive experience with debt and leverage, found vast new markets for the financial skills of banks and others. Thus, the missing manpower was replaced by expensive machines and chemicals, which led to farmers owning leveraged machines and farms.

 

The age-old problem with leverage is the cost-price spread abruptly narrows. In a world becoming increasingly more global, international trade becomes the fulcrum-point of the fluctuating cost-price spread. To protect those in the middle from price swings, tariffs and other restrictive measures were introduced.

The US consumer desired ever-increasing amounts of food, with much of it imported from lower cost countries. To protect home-grown crops, additional costs and restrictions were placed on imports. Exporting countries fought back by lowering their prices to a point where domestically produced products could not compete effectively. Consequently, domestic farmers got their elected politicians to impose tariffs on imports, like the Smoot-Hawley tariff that President Hoover was reluctant to do. (It was repealed three years later) Other nations reacted by imposing their own tariffs on US exports, which was a contributing cause for WWII. 

 

What will be the impact of the proposed Reciprocal Tariffs being proposed? Despite what is being said, it seems unlikely consumers will avoid some or more of the cost.

 

Learning from Uncle Warren

This weekend Berkshire Hathaway (*) published its results for the 4th quarter and all of 2024, along with a well thought out discussion. The company has four main revenue sources for the heirs of its shareholders. Berkshire has total or partial ownership of over 180 private companies and a smaller but better-known portfolio of quite large publicly traded companies. They also have an increasingly large portfolio of short-term US Treasuries, which increase in value as interest rates rise.

 

The difference between what their insurance companies charge and their eventual payout is called a “float”. In the most current period all earnings asset categories rose, except for the holdings of the publicly owned securities which declined because of sales. The total portfolio rose and is selling very close to its all-time high. Considering the company announced it is being managed for the benefit of today’s shareholder heirs; it is extremely appropriate to occasionally reduce its near-term market risks. (It is worth noting, the remaining two lessons in this blog suggest caution is warranted.)

(*) Owned in Personal and Client accounts

 

The Leading Mutual Funds Suggest US Risk

Each week I look at over 1500 SEC registered mutual funds, as well as many more in the global world. Usually, a number of different drivers describe the leaders of the week.

 

The list below shows the investment objective assigned to the fund:

Precious Metals Equity           21.04%

Commodities Precious Metals      11.86

International Large-Cap Value     8.60

International Mid-Cap Value       8.54

Commodities Base Metals           8.34

International Large-Cap Growth    8.24

Commodities Agriculture           8.15

Warren Buffet, among others, is concerned that the US government may cause the value of the US dollar to drop.

The year-to-date winners are not investing in the US.

 

“Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next?”

 Above is the title of Niall Ferguson’s article in Saturday’s Wall Street Journal where he introduces Ferguson’s Law, which was crafted in 1767. The law states “that any great power that spends more on debt service than on defense risks ceasing to be a great power.” According to the author, debt service includes repayment of debt and defense includes all costs to maintain the military. The US has just passed this milestone, but it would take an extended period to fundamentally break the Ferguson Law.

 

Working Conclusion

Be careful and share your thoughts, particularly if you disagree.

 

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Recognizing Change as it Happens - Weekly Blog # 876

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

 

Did someone forward you this blog?

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.